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Annuity Analytics: Age-Old Lessons From Japan

We can learn a thing or two from Japan, a country where nearly a quarter of the population is over the age of 65, and insurance product sales are brisk.

One of the many disorienting feelings that eventually hit you once you arrive in Japan -- or at least for people who think about demographics for a living -- is the lack of young children. I was in and about Tokyo for almost two full days before I actually saw any kids. It's not that I was actively looking for them or hanging out in the wrong parts of town.

The dearth of youngsters is an established fact. According to the Statistics Bureau in the Ministry of Internal Affairs in Japan, only 13 percent of the current population of over 127 million is under the age of 15. This is the lowest percentage for any country in the entire world. In contrast to the disappearing youngsters almost 23 percent of the Japanese population is over the age of 65, which is equivalently one of the highest rates in the world.

The same Statistics Bureau projects that under current trends the population will shrink by almost 25 percent by the year 2050. Contrast that shrinkage with the trend for the U.S. population which is expected to grow by 28 percent to 402 million by the year 2050. Japan has an aging problem and they know it.

In fact, when I asked many of the people I met from Kamakura to Yokohama what is the greatest problem facing Japan today, more often than not I heard the following response: Not enough babies. Indeed, the fertility rate -- which is the average number of children born to each female -- is a mere 1.34 in Japan, which is amongst the lowest in the world. Remember that you need at least two births per female (actually, 2.07 to be precise) for the population to grow naturally.

As one of my gracious hosts said after a few shots of Hibiki, Suntory whisky, the age distribution in Japan used to look like glorious Mt. Fuji, with a thick base on the bottom and a thin crown on the top. Now it looks like a pot-bellied foreigner; thin on the bottom, fat in the middle and growing on top.

All joking aside, the table on the next page is yet another snapshot of the difference between what the future looks like in Japan vs. North America. It shows that the probability a typical 65-year-old American female surviving 30 years of retirement to the age of 95 is 11 percent.

Remember that this figure is for the entire U.S. population without distinction as to health, race or wealth. In Japan this number is currently 22.4 percent.

And yet, with this aging phenomenon lies another little-known fact with enormous implications for the global financial services industry. Namely, Japanese consumers have one of the highest rates of life insurance penetration in the world. It is estimated that over 95 percent of households have some form of life insurance.

It is not uncommon to see young college graduates in their 20s purchasing life insurance with death benefits equal to five to 10 times their annual pay, well before they are married or even have any children. The typical Japanese personal balance sheet has about 20 percent of wealth allocated to life insurance.

Are the Japanese highly risk-averse? Is it pure altruism? Why have insurance companies been so successful? Is it the result of the atrocious performance of the Japanese stock market since their bubble burst in the late 1980s? Is it related to the deflation they have experienced in the last decade?

Actually, the answer -- and what I think is an interesting lesson on retirement planning -- lies in the gender of life insurance agents in Japan. You see, like in many other Asian countries they are mostly female. The Japanese affectionately call them the "Mother Troops."

Very few males sell life insurance for a living. That's obviously not the North American way. Yet, the origins of this anomalous gender distribution aren't as well-known.

Here is the legend. Soon after World War II, with millions of (male) soldiers killed and displaced, the Japanese government -- presumably together with General MacArthur's Supreme Command of the Allied Powers, SCAP -- collaborated with the life insurance industry to help put hundreds of thousands of impoverished widows to work, you guessed it, selling life insurance.

These "troops" would go into Japanese homes -- appealing directly to housewives -- promoting the benefits of life insurance protection, one policy at a time. They were extraordinarily successful. Think Tupperware parties designed by insurance actuaries. Alas, it doesn't take much imagination to envision the sales pitch from a Hiroshima or Nagasaki survivor. What better advocate could there be for embodying the benefits of personal risk management?

And so, one generation of females followed another generation into the business and today -- some 60 years later -- the overwhelming majority of life insurance agents for companies like Dai-Ichi Mutual, Nippon Life and Sumitomo are still female.

Yes, they now face stiff competition from a deregulated banking and securities industry and the predominantly male brokers at Nomura, Daiwa and Nikko, but the stereotypical image of the female insurance agent is still quite prevalent and justified.

Perhaps herein lies a key ingredient to increasing public awareness about retirement risks back here in the U.S. and successfully marketing annuity products to retiring baby-boomers. Instead of a brash 35 year-old wirehouse broker promoting the virtues of daily step-ups over annual ratchets, let's put Grandma to work.

Think of it as the aging version of the Mother Troops selling longevity insurance. Is there a better way to galvanize and scare people into properly planning for their old age than by sitting across the table (and walker) from a 95-year-old female talking about a negative sequence of investment returns?

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Moshe A. Milevsky, Ph.D. is a professor at York University in Toronto, Executive Director of the non-profit IFID Centre at the Fields Institute and CEO of the QWeMA Group (www.qwema.ca). His most recent book entitled Your Money Milestones: a Guide to Making the 9 Most Important Financial Decisions in Your Life, was published by FT/Pearson in January.

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